Revenue for Telecoms

Revenue for Telecoms – Issues In-Depth | 65
3.8 Warranties |
Service level guarantees
The term ‘service level guarantee’ is used in some telecom contracts to require
an entity to meet a minimum service level – e.g. having the network available
to transport data for 95 percent of the time. When the minimum service level is
not met, adjustments to the transaction price occur, typically through penalties
that reduce the consideration paid to the telecom entity. These service level
guarantees are not a performance obligation but, instead, generally result in
variable consideration and affect the transaction price (see 4.2).
Comparison with current IFRS
Presence of warranty clause does not preclude recognition of revenue
[IAS 18.16(a), 17, IAS 37.C4]
Under IAS 18, a standard warranty clause in a sales contract that does not result
in the seller retaining significant risks does not preclude revenue recognition
at the date of sale of the product. In this case, the telecom entity recognizes a
warranty provision under IAS 37 at the date of sale, for the best estimate of the
costs to be incurred for repairing or replacing the defective products.
However, an abnormal warranty obligation could indicate that the significant risks
and rewards of ownership have not been passed to the buyer, and that revenue
should therefore be deferred.
Unlike current IFRS, the new standard does not envisage that the presence of
a warranty would ever preclude the recognition of all of the revenue associated
with the sale of the product. This could accelerate revenue recognition in some
cases compared to current IFRS.
Comparison with current US GAAP
Entities will be required to consider factors in addition to considering
whether a warranty is separately priced
Topics 450, 460
Under current US GAAP, warranties that are not separately priced are accounted
for when the goods are delivered, by recognizing the full revenue on the product
and accruing the estimated costs of the warranty obligation. The warranty
is only treated as a separate unit of account under current US GAAP if it is
separately priced.
Under the new standard, an entity evaluates whether the warranty provides a
service regardless of whether it is separately priced – and, if it does, assesses
whether it (or part of it) is a separate performance obligation.
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